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As professional services firms continue to expand their operations internationally, there is an incr...

As professional services firms continue to expand their operations internationally, there is an increased risk of being dragged into expensive litigation in unfamiliar jurisdictions. Adam Culy explains how it pays to be careful when going global.

A recent High Court decision has highlighted the issues that can arise for international umbrella organisations and their insurers, suggesting that underwriters should examine policy construction more closely, particularly in the current climate of contract certainty.

The judgement, Brit Syndicates v Italaudit, illustrates the need for professional firms and their professional indemnity insurers to give careful consideration to their insurance arrangements if they intend to extend their international reach (see box).

The Parmalat litigation led to claims not only against Parmalat's local auditors - Grant Thornton SPA and Deloitte Italy - but also their international organisations, together with member firms in the US. Grant Thornton UK is not involved in this or the Brit case.

Claims against the US member firms and the international organisations were made on the basis that the local Italian auditors were merely agents for their international networks, which in turn were controlled by the US. Although the claims against Grant Thornton US were struck out, those against the international umbrellas and Deloitte US were allowed to continue following last July's judgement of the New York Court.

Cover needs

Parmalat re-emphasised the requirement of international organisations to have adequate professional indemnity cover. It also highlighted the need for local firms that are members of international networks to ensure they have adequate cover to meet the risk of being drawn into claims in other jurisdictions.

The risk of such claims - especially costly class action litigation in the US - cannot be eradicated, and is one of the trade-offs for the fruits of globalisation. However, underwriters can draw comfort from firms adopting certain risk management practices, including emphasising their independence as separate legal entities from others in the network; avoiding presenting themselves as a global firm; describing the international organisation as not exercising any control or ownership; and prioritising local marketing over global initiatives.

If firms become global, they should be reassured by the Brit case in that they can structure their insurance so that avoidance or exclusion for local member firms will not affect cover for the innocent international organisation. To this extent, an international organisation can stand alone as a separate insured.

The case also reminds underwriters that ambiguities in policy construction are likely to be construed in favour of insured firms. The intention behind the wording concerning cover for Grant Thornton International was probably, as the judge found, just a descriptive rather than legal method of defining the circumstances clarifying the right to an indemnity.

If insurers genuinely intend on excluding cover for international organisations, in the event that cover for the local firm is excluded or avoided, they will need to make this clear in their policy wordings. This could be achieved by including the words suggested by Justice Langley in the judgement, such as "entitled to an indemnity" or "validly insured".

What seems more likely is that insurers will take up the opportunities arising from the need for cover for international organisations. This will involve charging a premium based on a careful assessment of the risk of litigation against the international organisation and other member firms.

Once such a decision is made, underwriters will have one eye on an agreed definition for insurance contract certainty - "the complete and final agreement of all terms".

As products for international networks mature, ambiguities of the type that generated this policy dispute should diminish. However, given that the spoils of globalisation are often accompanied by regulatory and litigation risks, more skirmishes between international organisations and their insurers should be expected in the future.

CASE STUDY: INTERNATIONAL INDEMNITY CLAIM

Brit Syndicates (and other underwriters) v Italaudit SPA (formerly Grant Thornton Italy) and Grant Thornton International - High Court, 3 March 2006

Following the notification of claims arising from the Parmalat scandal, insurers considered coverage for both Grant Thornton Italy and Grant Thornton International - the group's umbrella organisation responsible for co-ordinating its international network. Cover for GT Italy had been avoided for material non-disclosure. GT's 93 member firms were named as assured firms in the policy. GT International was not itself named as a member firm but an extension provided that it was included as an "assured firm" in the event of claims against it arising from claims made against a member firm of GT International, insured by the terms and conditions of this policy.

Insurers contended that because cover had been avoided for GT Italy, GT International was not covered under the extension. Their argument was that the effect of the avoidance meant that GT Italy was never an "assured" or "member firm" pursuant to the policy. Since GT International's cover was contingent on claims against member firms insured under the policy, that condition was not met and as such there was no cover for GT International. The argument for GT International was that the extension was only descriptive, merely setting out that it would be insured for claims against the member firms set out in the schedule (including GT Italy).

The judge preferred GT International's contentions and found the following:

- the words "insured by the terms and conditions of this policy" in this context did not mean "entitled to an indemnity" or "validly insured" (as was the insurers' case);

- the court could not ignore reality, namely that "until it was avoided, GT Italy was not only a member firm but one which was in fact and in normal language 'insured' under the policy";

- the extension was merely descriptive of the member firms named in the schedule;

- on principle, GT International should not be affected by the conduct of other assureds;

- ordinary construction of words used in the extension should not be affected by the legal principles of avoidance.

The result was that GT International was successful in its argument of being entitled to an indemnity under the policy. It is understood that the insurers concerned have made application for leave to appeal the decision but no date has been set as yet.

Adam Culy is a solicitor at law firm Reynolds Porter Chamberlain.

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